NCF & Partners (NCF) is a firm of CPAs located in Whitby that has been in business for 20 years.

NCF’s revenue has declined steadily over the past few years. The partners are looking for ways to increase the firm’s revenue and client base and so has developed a new advertising strategy which guaranteed that it will conduct its audits with minimal disruption to its clients with a promise that audits will not last longer than two weeks.

NCF is also offering all new audit clients a free accounts preparation service for the first year of the engagement, since the partners believe that time spent on subsequent audits will be reduced if the firm has previously produced the financial statements.

In addition, NCF is seeking to reduce its audit costs and decided it will not update the engagement letters of existing clients, on the basis that these letters do not tend to change much on an annual basis.

One of NCF’s existing clients (John Madoff Co. Ltd) has suggested that this year’s audit fee should be based on a percentage of their final pre-tax profit. The partners are excited about this option as they believe it will increase the overall audit fee.

One of NCF’s partners recently got married to the Chief Financial Officer of Tim Wharton Company Limited (Tim Wharton). Tim Wharton has been a client of NCF for the last 15 years.

NCF recently hired Bill Bates (a CPA with considerable Information Technology experience) who was previously the team leader for the implementation of a new financial system for Nutmeg. The partners have scheduled Bill is to lead the audit team for Nutmeg’s audit and feels that it will not be necessary to review the application controls of Nutmeg’s new financial system as they can place reliance on the work done by Bill Bates.

Navin Jones, a CPA working with NCF, was the lead auditor on the audit of a large client Gupta Co. He is aware that Gupta is about to release its annual audited statements and the results are spectacular. Navin hurriedly bought some Gupta shares with the expectation that the share price will go up.

NCF has recently obtained a new audit client, Nutmeg Brothers Co (Nutmeg), whose year end is 31 December. Nutmeg is insisting that their audit must be completed by the end of February. However, this is a very busy time for NCF and so it is intended to use more junior staff as they are available. Additionally, in order to save time and cost, NCF does not plan to contact Nutmeg’s previous auditors.

Required:

a) Describe the steps that NCF should take in relation to Nutmeg prior to accepting the audit engagement

b) State four matters that should be included within an audit engagement letter

c) Identify and explain EIGHT ethical risks which arise from the above actions of NCF & Partners; and for each ethical risk explain the steps which NCF & Partners should adopt to reduce the risks arising.